The Myths About Stock Trading
For many individuals, any discussion on the stock market brings fear and doubt.
IMMEDIATE CROWD REACTION TO STOCK MARKET INVESTMENT
The stock market is a form of GAMBLING: FALSE
How did this myth start? It began when speculators (see. Nortel and the dot.com story ) tried to time the market. In everything, there will be some who attempt to gamble
Let’s debunk some of the popular myths:
- Q: Why was the stock market created?
- A: It was created to raise CAPITAL for companies to expand.
Let’s say ABC Co was in the oil rig-building business. It has an opportunity to drill in the North Sea. To do so it needs a specialized oil rig which will cost $ 1.5 billion to build. ABC Co has approx. $ 250 million that it can draw from its bank account. Where will it go for the remaining $ 1.25 billion need? Banks will NOT lend ABC Co the $ 1.25 billion because they will not accept the ‘risk’. Risk? Yes, what if they do not strike oil, how will the repayment of the loan be made?
However, the banks may be interested in debt financing such as bonds assuming that they are comfortable with ABC Co ‘risk’. A group of (say) 10 banks may be willing to ‘underwrite’ up to $ 250 million with each bank being exposed to $25 million of ABC Co risk.
So far, we have accounted for $ 500 Million ($ 250 Million from Cash Account & $ 250 million from Bonds – Bank Debt)
For the remaining requirement of $ 1 billion, ABC Co will likely issue shares – let’s say at $10 per share i.e. 100 million shares to the public (via Institutional investors e.g. Merrill Lynch; Goldman Sachs etc.) – raising $ 1 billion from the ‘market’.
Cash from ABC Co $ 0.25 billion
Bank Debt (Bonds) $ 0.25 billion
Equity Market $ 1.00 billion
Why would the ‘public’ buy ABC Co shares? The assumption (based on one’s own research) is that the North Sea rig will hit a ‘gusher’ and generate lots of profit for ABC Co. In that case, the $ 10 ABC CO shares will increase in value to – let’s say $ 20 per share which will give the investor (who took a risk), a 100% return on his original investment. While this is an unlikely scenario (i.e. a 100% return), the point is that investors get a higher return from stock market investments (either through share price appreciation or dividends or both)than in any other form of wealth building strategies.
The stock market is very RISKY. Every enterprise carries some form of risk.
Any venture is risky when entered into without knowledge.
- Q: Would you drive a car without having learnt to drive?
- Q: Would you fly a plane without having learnt to fly?
- Q: Would you put your money in a bank that has no offices in Canada?
– all of the above would be risky.
You need a PhD in finance to understand stock market investments. FALSE
This is a myth propagated by the financial services industry so that you are beholden to them. That’s the reason they have ‘certified’ financial planners who are really sales people in camouflaged in “expert” clothing.
Recent activities in Wall Street clearly illustrates that there is no such thing as “Smart” money.
Anyone who has the ‘knowledge’ and the ‘discipline’ can invest in the stock market with CONFIDENCE and CONSISTENCY.
You can’t beat the stock market. TRUE (but we can beat the performance)
Beating the stock market’s own performance is not possible, and those individuals that do actually accomplish this feat will not have their “luck” last for long. Don’t bother trying to outsmart the stock market, just accept that you aren’t going to outsmart the millions of other investors who believe the stock market isn’t beatable.
The stock market is able to be beaten in terms of performance
Investors and traders, do it every year, and some do it every year consistently. Most investors simply don’t have Knowledge & Discipline to actively manage their portfolios and thus do not have the ability to outperform the stock market over the long term, which is why this myth refuses to die.
When someone makes money, someone else losses it FALSE
This is the belief that the stock market is a zero-sum game. So, when one investor losses money on a stock, someone else has gained that money. In essence, it is the belief that money never grows in the stock market but is simply transferred from the ignorant to the savvy investor. The stock market is not
a zero-sum game.
What allows the stock market to go against this belief is that over the long-term investors can all profit as long as the stock market is constantly going higher. So even if I lose some money on a few stocks this year and gain on some others, if I invest for the long term, I will be profitable as will all other investors since prices are continuously going higher over the long term.
Imagine the wealth being generated in the Global economy e.g. China, India etc.?
At the mercy of ‘EXPERTS’
The typical stock trader in the market today is totally at the mercy of forces beyond their control. They are subjected to biased advice
, computer-based software gimmicks
, hundreds of investing web sites, thousands of books, an unending barrage of media-based financial ‘ sound bites’ and a host of other ‘expert’ opinions that make stock market investing a pure GAMBLING exercise.
TO BE A SUCCESSFUL INVESTOR
- (successful investor is defined as one that is recording CONSISTENTLY positive returns) - you need KNOWLEDGE & EDUCATION (which this book provides) and you bring the necessary DISCIPLINE & MOTIVATION.
You cannot invest with CONFIDENCE & CONSISTENCY in the stock market by:
Only KNOWLEDGE & EDUCATION with the aid of a tool (usually charting software) can help you achieve the CONFIDENCE & CONSISTENCY required to be successful in stock market investing.
- Reading books (including Mr. Buffet’s methodology)
- Listening to sound bites from ‘experts’ on TV and/or radio.
- Buying into ‘magic’ software packages that recommend ‘picks’.
- Attending 3-7 ‘full-day’ seminars held in various cities.
- Watching some technical analysis genius trade on his computer.
- Reading specialists (read BIASED) News Letters.
- Buying the latest NEW trend (e.g. IPO or some exotic new stock).
- Going on an ‘Investment Cruise’ with ‘experts’.
What prevents the average person from taking advantage of the stock market?
- 1. Fear- Of starting anything NEW (i.e. of attempting things that society has generally deemed impossible.)
- 2. Greed- Instant gratification (i.e. having a ‘get-rich-quick’ mind-set).
- 3. The rapid PACE of change- not understanding the technological advances that takes place EVERY few years!
Most people understand what FEAR & GREED are but are ignorant about ‘the RAPID PACE of Change’ taking place in the world!
Billions of people can now afford the technology.
It took more than a century to populate the planet with 1 billion telephones. The second billion took only five years. By the end of this decade 2 billion people will own - not just phones, - but phones with Web browsers. That means 2 billion people will shortly have a ticket into the global economy.
Internet search and transparency.
A decade ago, if I wanted to do competitive research on the operating models and economics of any industry and business, I might have gone to McKinsey & Co. or Goldman Sachs.
(The research would have cost tens of thousands of dollars). Today Grade 12 students in front of computers with access to Google
can get the research faster and for free. In China there's a saying: "One man's margin is another man's opportunity."
Now millions can imagine opportunity from trading on the stock market!
The pace of change is accelerating
. Rewards are going to those companies that are exceedingly fast, clever and capital efficient. There is no mystery here, no conspiracy, no abstract villain. Globalization is not the problem. Change--that's our challenge.
1903 – The Wright brothers made the first flight
1969 – Man landed on the moon
66 years – ONE generation, what technological changes took place?
WHY IS THIS?
By the time the average adult begins his career, he has completed almost 16 years of education in numerous disciplines. However, his knowledge of money management and wealth creation is extremely limited for many reasons – for example, the educational system is geared to train one to get a job – regardless of the college or university degree, the aim of that degree is to train you in a profession which ultimately leads to ‘landing’ a job! Preferably one with a pension! Result – living from pay-check to pay-check is the norm for the majority of citizens in the world. However, the wealthy have been trained to:
“Based on in-depth interviews with numerous MILLIONAIRES, the study found the following factors vital in their (
- Firstly, to excel in educational pursuits (i.e. to have a disciplined mind)
- Secondly, to treat living life as a ‘business’ (i.e. ensuring a solid work ethic).
- Finally, to learn the principles of becoming wealthy (i.e. to make their savings/investments work for them).
wealthy individuals/families) financial success:
Thomas J. Stanley: The Millionaire Mind
- INTEGRITY – honesty in all relationships
- DISCIPLINE – self-control in every area of life
- SOCIAL SKILLS – friendly relations with people
- HARD WORK – a willingness to work harder than most people
- SPOUSE – a supportive spouse “
A SUPPORTIVE SPOUSE?
Usually the following scenarios are played out in MILLIONS of households across the nation (if not around the world):
- INDIFFERENCE– ‘I really don’t care what you do (i.e. DON’T ASK, DON’T TELL) – just show me the money, honey!’ OR
- DISTRUST– ‘I am tired of your many ‘hare-brained’ schemes that have not worked. I will NOT let you make anymore ‘independent’ decisions (i.e. I WILL have the final say!). OR
- INDEPENDENCE– You keep your money & I will keep mine (i.e. WE ARE NOT A FAMILY - We just exist for ……..whatever the excuse they have conjured up to really fooling themselves, their children, the neighbors, their relatives…. etc.).
In all these cases, the solution would seem to be to seek OUTSIDE ‘experts’ to ‘advice’ them on how they should manage their savings/investments.
Why is it that most families are unable to be SUPPORTIVE of their spouse when it comes to wealth management?
Before we review the above, let’s answer the following question:
WHO TAUGHT US WEALTH MANAGEMENT?
Did we learn wealth management?
- From school?
- From friends?
- From parents?
- From books or seminars?
- From university or college?
ANSWER: Usually through OSMOSIS – from a combination of the above!
There is a FALSE assumption that if you studied accounting, finance etc – even an MBA – you would have learnt HOW TO BECOME WEALTHY? WRONG – you would have been taught about
wealth management and how to get a job and work for someone else – and in due course you MAY become wealthy!
Most people learnt about money and/or wealth management from their families (tradition).
Problem is that spouses come from different households (i.e. different views of money management/wealth building concepts) even if they came from the same
- Entrepreneurial background
- Risk-level: high risk-taker e.g. Options trading
- Vacations: Hawaii with 5-star hotel
- Civil Servant (pension-based) background
- Risk-Level – Low risk-taker e.g. GIC Queen
- Vacations: Going camping with relatives- tent
As you can see from the above, they have VERY DIFFERENT RISK PROFILES but yet they were attracted enough to have gotten married. (Opposites attract, eh? – Yes, that’s before marriage BUT after marriage they ATTACK!)
Usually the one with a higher RISK TOLERANCE (either husband or wife) would have attempted to accumulate wealth through a number of methods. Before we look at the potential options for wealth generation, let’s review the picture below:
WHICH APPLE WILL YOU PICK?
The cautious spouse will pick the SMALLER one; the risk-taker will go for that BIG one.
BUT there may be some gunslingers who say ‘Back up the truck, we will take the TREE!’
Yet, neither decision is wrong.
It depends on a person’s RISK TOLERANCE – a concept that most families don’t understand. A person is WIRED (actually created) that way and there is nothing we can do to change them!
Any attempt to FORCE A ‘BEHAVIOR’ CHANGE (usually through manipulation, sarcasm, public humiliation, mind-games etc.) will result in frustration, bitterness, anger, distrust ……….
…………… ultimately in DIVORCE!
Because MONEY is usually the ultimate ‘SECURITY BLANKET’ that most individuals hold onto. In fact, it becomes their ‘god’ as they increase in age! (Have you heard how people plan for their OLD AGE? Planning is good; being OBSESSED is not.)
THAT’S THE REASON….
Many people, who are extremely successful in their BUSINESS, in the JOBS, in their PROFESSIONS etc. but when it comes to wealth management (in particular, the stock market), a GREAT SENSE OF FEAR overtakes them!
SO…THEY TURN OVER THEIR HARD-EARNED SAVINGS / RRSP(S)/ 401(k) etc. to outside “EXPERTS”.
- Spouses have NO CONFIDENCE in their spouse’s money management skills
- The ‘OBJECTING’ spouse has NO CLUE what to do either.
How do they pick these EXPERTS? Put it another way, what skill-set does the husband or the wife possess to determine that these are ‘EXPERTS’?
The decision is usually based on a slick presentation, a ‘big’ corporation image & ‘gut-feeling’ i.e. blown away by the ‘FACTS & FIGURES’ presented to them (or it could be that the EXPERT is the ‘MOTHER-IN-LAW’?)
The gist of the presentation would be like this:
- By the time you reach 65 years (used to be Freedom 55 in the old days), you will have enough money to live like Bill Gates
- You will achieve that WITHOUT much risk – DIVERSIFICATION is the answer!
Unless the family is on the SAME page, there will be dissension in the camp. Ultimately, the CHILDREN will be totally confused & the NEXT GENERATION will live from paycheck-to-paycheck!
90% OF WEALTH MANAGEMENT ATTEMPTS BY FAMILIES ARE THROUGH “TRIAL & ERROR” METHODS.
- MUTUAL FUNDS – Due to the failure of spouses understanding their RISK TOLERANCES, the easiest way (with the ability to ‘blame someone else’) is to find a Financial Planner to take the responsibility of managing the family’s INHERITANCE. No regard to RETURN versus COST is considered.
- MULTI-LEVEL MARKETING – jumping on the bandwagon LONG after the wagon is gone. Building ‘legs’ & trying to sell the product (usually SOAP) to friends and family is not a winner.
- NETWORK MARKETING – a variation on the above. Again, selling ‘Vacuums’ may not bring your friends, let alone wealth. Mostly, consumed by immediate family members – eating the seed instead of sowing it!
- REAL ESTATE – Excellent investment strategy in an uptrend economy. Usually extremely successful in the initial stages of a ’bull’ market especially when buying ONE house and then making a ‘killing’ on it. Suddenly, GREED sets in and in an attempt to become ‘Mr. TRUMP’ in 7 days or less; a number of units are purchased with MINIMUM down payments so that it can be ‘FLIPPED’ quickly for a “SUBSTANTIAL” profit. Unfortunately, you & 50,000 other people came to the SAME conclusion at the end of the ‘HOT’ market! Massive losses or foreclosures or manager of tenants is the result.
- FRANCHISES– extremely costly enterprise. Royalties can potentially destroy the franchise-owner. It is nothing MORE than BUYING a 20 hour a day full-time job!
- FOREX (Foreign Currency Trading) – extremely speculative. Competing with global foreign exchange money managers in a 24/7 market. Your simple software cannot compete. PERIOD.
- COMMODITIES– similar to FOREX. Challenges: Forecasting future global demand for specific commodities and unpredictability of weather patterns.
- OTHERS: Black Box Computer Programs that trade penny stocks, FOREX; Options; Futures etc. – nothing more than gambling based on some “PROPRIETARY” system.